Exxon Mobil's hard line on expropriation

Stakes are high as competition for production rights intensifies

By

SteveGelsi

NEW YORK (MarketWatch) -- Exxon Mobil Corp. won an early round in its oil field dispute with Venezuela, but it will likely take years for the energy giant to prove it has a right to any of the $12 billion in Venezuelan assets that courts ordered frozen last week while the two sides wrangle over compensation for production licenses that went sour.

Industry pundits looking at the bigger picture warn that fights like this may become more common as sovereign rights are pitted against corporate contracts tied to energy output.

"When private companies, such as Shell and Exxon Mobil, control the oil, they will put it on the market for the best price. When nations such as Venezuela control the resource, they will sometimes use their sale for political ends," said Lester Lave, professor of economics at Carnegie Mellon's Tepper School of Business.

'They're taking a tough stand based on what they believe is right. They're trying to send a strong message.'
Bruce Bullock, Southern Methodist University

He cited Venezulean strongman Hugo Chavez and Vladimir Putin, the outgoing president of Russia, as two leaders who think of oil in strategic terms.

Lave forecast a growing number of contract disputes, noting that only about 5% of the world's estimated untapped oil and gas reserves are open to private companies. National oil companies or their governments hold the rest.

Even if Exxon Mobil
XOM, -2.29%
were to win its expropriation fight with Venezuela on all counts tomorrow, the $12 billion at stake would amount to only 3% of the company's $405 billion in 2007 revenue. See related story.

While it's a substantial figure, the spoils are potentially worth much more to Exxon Mobil on another score, as the company shows the world that it'll battle hard to protect contractual rights signed with state-run oil companies.

Outside game

Exxon Mobil, based in Irving, Texas, ranks as the world's biggest private oil company by revenue. A check of its latest quarterly report shows about 84% of its $8.3 billion in exploration and production earnings came from fields outside the U.S.

Not surprisingly, Exxon has unleashed a veritable army of lawyers against Venezuela in what is already a high-profile, vocal showdown that it hopes will make other host governments think twice about tampering with existing production licenses.

"They're taking a tough stand based on what they believe is right," said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University. "They're trying to send a strong message."

Along these lines, the moves now appear to be hindering Venezuela's ability to do business in London, New York and other money centers.

On Thursday, Venezuela's congress urged Chavez to pull out of the World Bank's arbitration unit, even as a federal judge in Manhattan upheld an order freezing $300 million in assets of state-owned Petroleos de Venezuela.

Exxon Mobil also drew support this week from the State Department, which issued a statement acknowledging the company's efforts "to get a just and fair compensation package for their assets according to the standards of international law."

In another wrinkle for Venezuela, the Exxon Mobil case is complicating an overseas mechanism in place to pay for a popular transit subway subsidy program in London funded by Petroleos de Venezuela. See related story.

Last week, the Latin American country's sovereign bonds slumped immediately after U.S. and U.K. courts froze the $12 billion in Petroleos de Venezuela assets. See related story.

Exxon continues to pursue its legal fight with no immediate deadline in sight, saying last week: "We cannot estimate how long the arbitration will take to come to a conclusion. We remain willing to engage in substantive discussions with the Venezuelan government."

Carnegie Mellon's Lave said the Venezuela fight is a byproduct of international oil companies being forced to compete for exploration acreage in countries striking a tougher stance in farming out production licenses to foreigners.

Mexico nationalized its oil fields back in the 1930s, launching a trend followed by Saudi Arabia and other major oil producers. In recent years, Russia and other former members of the Soviet Union have kept control of their vast oil reserves in state hands.

"They've been the victim of expropriation a number of times -- this time they decided they would get their back up and do something about it," Lave said of Exxon.

"What goes on from here? Chavez had said he won't sell oil to the U.S., but Venezuela has heavy oil and not many refineries around the world can handle this oil.

"We're locked in a symbiotic relationship with Venezuela where they have to sell their oil to us and we're set up to buy their oil. We can go to economic war with them, or try to find a way to accommodate each other," he added.

Roots of dispute, angry rhetoric

The roots of Exxon Mobil's current battle reach back to last summer, when its Mobil unit in Venezuela failed to accept the terms offered by Petroleos de Venezuela, to make the company the majority partner on Orinoco River basin heavy oil projects.

Exxon owned a 42% stake in the Cerro Negro project in the region. At the time of the expropriation in June of last year, Exxon's remaining net book investment in Cerro Negro producing assets was about $750 million, the company disclosed.

The project carried estimated production of 105,000 to 110,000 barrels a day, with a fair market value for Exxon Mobil of about $2.3 billion, according to Wood Mackenzie data.

Heavy oil production assets expropriated at the same time from ConocoPhillips
COP, -0.97%
were estimated to be worth $7 billion, according to estimates. The company took an after-tax charge of $4.5 billion last year due to the loss.

Meanwhile, Chevron Corp.
CVX, -1.62%
the second-biggest U.S. oil company after Exxon, as well as London-based BP Plc
BP, -1.51%
France's Total SA
TOT, -0.57%
and Norwegian state oil company Statoil ASA
STO, +0.00%
agreed to accept minority stakes on their Venezuelan production licenses.

Striking out on its own, Exxon took its case to the World Bank's International Centre for Settlement of Investment Disputes. And last month, the company filed a second arbitration claim with the International Chamber of Commerce.

Last week, Exxon obtained a worldwide freezing order from the High Court in London against Petroleos de Venezuela, which is prohibited from disposing of its assets worldwide up to a value of $12 billion. It also received orders from courts in the Netherlands and Netherlands Antilles against Petroleos de Venezuela assets.

Exxon's Mobil Cerro Negro unit also obtained an attachment of approximately $300 million against Petroleos de Venezuela from a federal district court in New York City.

ConocoPhillips is pursuing both arbitration and negotiations with Venezuela.

"We have two routes," said James Mulva, the chief executive of ConocoPhillips, this week. Mulva told Dow Jones Newswires that he hoped to resolve the dispute in 2008 but that reaching an agreement this year is not a hard goal.

Long legal grind

These preliminary skirmishes are leading up to what will likely be a lengthy legal battle.

Patrick Esteruelas, Latin American analyst with consultancy Eurasia Group, predicted the courtroom wrangling could last for three or four years, during which Exxon will have to prove that Petroleos de Venezuela has no intent to provide any compensation for Exxon's Orinoco Basin oil field facilities or lost production there.

"Exxon has asked the courts to freeze up to $12 billion in assets, almost six times what the company is owed for its stake in the Cerro Negro project," Esteruelas said in a note to clients.

If Exxon Mobil's asset seizure is successful, however, Petroleos de Venezuela could "find it more difficult to raise additional financing to support its investment plans and growing spending obligations."

Venezuela hopes to sell about $15 billion in refinery assets in the U.S., Europe and the Caribbean, he said.

Whatever the outcome, industry pundits said the move by Exxon Mobil will be closely watched as large oil companies continue to work with state-run oil companies in regions from Russia to Saudi Arabia and Africa.

"They're saying that expropriation isn't the proper course," said Lynn Westfall, chief economist for Tesoro Corp.
TSO, +0.00%
a major U.S. refiner. "Their message is to abide by international law and compensate us for our property."

Looking ahead, Lave cautioned that Exxon Mobil's clout could be limited in such legal fights.

"Exxon is trying to get a better price for what was taken away from them in Venezuela. If I were advising Exxon, I'd say your chances of being able to cut a better deal now is good, but your power will decline," he said.

"With nations taking active control of their oil and gas resources, U.S. oil companies will find themselves becoming minority partners in state ventures or, worse still, simply consultants hired to find and produce oil for a foreign government company."

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.